Partial budgeting is a simple planning tool used to estimate the financial gain or loss by changing some aspect of the business or making a ‘partial’ change to the farm system.

It focuses only on the changes in revenue and costs that would result from implementing a specific alternative rather than including all farm revenue and costs.


When and how do you use a partial budget?

Partial budgets can be used for:

  1. Enterprise substitution: can be a complete or partial substitution of one enterprise for another e.g. convert from dry stock to dairying.
  2. Input substitution: changes involving the substitution of one input for another or the total amount of the input to be used, e.g. making supplement on the farm rather than buying in; going from a high input to all grass system; increase or decrease nitrogen use.
  3. Size or scale of operation: change in the total size of the farm business or in the size of a single enterprise, e.g. buying or leasing more land.

Identify the most 'important' factors first

Partial budgeting analysis is a useful tool in decision making however does not necessarily lead to identifying the most important or high priority areas that contribute to overall farm profit.

It can therefore be very helpful to have completed a full historical financial analysis of the farm business to identify the current overall farm performance e.g. an option may be to grow turnips but, after further analysis of the whole farm, pasture utilisation is low and herd mating results are below target. Because of this there may well be a higher return by focusing on improving these factors first.

Handling capital expenditure and change in debt

To account for capital expenditure as part of a proposal depreciation and cost of capital or interest cost should be included.  If assets are sold an interest saving should be included rather than the total asset value.

Net present value approach

Partial budgeting does not account for changes in the value of money over time. If analysis is required to focus on effects that occur more than a year or two in the future, then a net present value approach should be used, which discounts the dollar amounts in future years to account for the lower value compared to current-year dollars.